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Intermediate Micro Exam 1 Vocab

Terms in this set (32)

Theory of Consumer Behavior
description of how consumers allocate incomes among different goods and services to maximize their well-being
Market basket (or bundle)
list with specific quantities of one or more goods
Indifference curve
curve representing all combinations of market baskets that provide a consumer with the same level of satisfaction
Indifference map
graph containing a set of indifference curves showing the market baskets among which a consumer is indifferent
Marginal Rate of Substitution
maximum amount of a good that a consumer is willing to give up in order to obtain one additional unit of another good
Perfect Substitutes
two goods for which the marginal rate of substitution of one for the other is a constant
Perfect Complements
two goods for which the MRS is zero or infinite; the indifference curves are shaped as right angles
Bad
good for which less is preferred rather than more
Utility
numerical score representing the satisfaction that a consumer gets from a given market basket
Utility Function
formula that assigns a level of utility to individual market baskets
Ordinal Utility Function
utility function that generates a ranking of market baskets in order of most to least preferred
Cardinal Utility Function
utility function describing by how much one market basket is preferred to another
Budget Constraints
constraints that consumers face as a result of limited incomes
Budget Line
all combinations of goods for which the total amount of money spent is equal to income
Marginal Benefit
benefit from the consumption of one additional unit of a good
Marginal Cost
cost of one additional unit of a good
Corner Solution
situation in which the marginal rate of substitution of one good for another in a chosen market basket is not equal to the slope of the budget line
Marginal Utility
additional satisfaction or usefulness a consumer gets from having one more unit of a product
Diminishing Marginal Utility
principle that as more of a good is consumed, the consumption of additional amounts will yield smaller additions to utility
Equal Marginal Principle
principle that utility is maximized when the consumer has equalized the marginal utility per dollar of expenditure across all goods
Price Consumption Cruve
curve tracing the utility maximizing combinations of two goods as the price of one changes
Individual Demand Curve
curve relating the quantity of a good that a single consumer will buy to its price
Income Consumption Curve
curve tracing the utility-maximizing combinations of two goods as a consumer's income changes
Engel Curve
curve relating the quantity of a good consumed to income
Substitution Effect
Change in consumption of a good associated with a change in its price, with the level of utility held constant
Income Effect
change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant
Inferior Good
a good that has a negative income effect
Giffen Good
good whose demand curve slopes upward because the (negative) income effect is larger than the substitution effect
Market Demand Curve
curve relating the quantity of a good that all consumers in a market will buy to its price
Isoelastic demand curve
demand curve with a constant price elasticity
Speculative Demand
demand driven not by the direct benefits one obtains from owning or consuming a good but instead by an expectation that the price of the good will increase
Consumer Surplus
Difference between what a consumer is willing to pay for a good and the amount actually paid
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